On 22 January 2020, the Government published draft secondary legislation in connection with the upcoming reforms to the IR35 / off-payroll working rules. Broadly, this gives HMRC wide powers to pursue businesses for unpaid PAYE and NICs where the new rules apply.
To recap, the Government is proposing major changes to the IR35 rules from 6 April 2020 for medium and large businesses in the private sector, to shift the tax and compliance burden away from contractors and their personal service companies (PSCs). Going forward, it will be the end-user (i.e. the business ultimately using the contractors' services) that will be required to determine whether IR35 applies. Any consequent PAYE and NICs obligation will fall on the party that actually pays the PSC (the "fee-payer"). In a simple scenario, this may also be the business end-user; in a more complex supply chain, it may be (for example) a staffing agency engaged by the business end-user to supply the worker.
The new draft regulations give HMRC the power to pursue the end-user for unpaid PAYE and NICs where HMRC consider there is no realistic prospect of recovery from the fee-payer within a reasonable time. There is no defence available to the end-user on the grounds that it took reasonable care (or similar). HMRC also appear to have a wide discretion as to when to exercise this power. The accompanying technical note states that they will not do so "in the case of genuine business failure of the party ordinary liable for the income tax and NICs." However, this qualification is not contained in the draft legislation. And one can well imagine that HMRC and taxpayers may have different views as to what constitutes a "genuine business failure" for these purposes.
The regulations also have a provisional commencement date of 6 April 2020. This further suggests that the IR35 changes will indeed be coming into force then, despite the recently-announced review.
Overall, the draft legislation highlights again the need for affected businesses to ensure they are properly prepared for the upcoming IR35 changes. In particular, it shows the importance of conducting due diligence on existing labour supply chains and also putting in place processes and procedures to audit supply chains going forward.
The changes proposed mean that HMRC will first seek to recover any unpaid tax liabilities from the agency the client contracts with, where this agency is UK-based (agency one in the labour supply chain). Where HMRC are of the view that there is no realistic prospect of recovering the outstanding Income Tax from agency one, HMRC will then seek to recover unpaid liabilities from the client.
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